Politics and the Pipeline

"Even in my own energy producing state, we have hundreds of trillions of cubic feet of clean green natural gas, and we're building the nearly forty billion dollar natural gas pipeline, which is North America's largest and most expensive infrastructure project."
Governor Sarah Palin - Vice Presidential Debate - 10/2/08

In the 1996 blockbuster "Top Gun", there is a scene where a young hot shot pilot gets called out by his commanding officer after a risky stunt; "Maverick, your body is writing checks your butt can't cash." 

It seems history is repeating itself for at least one self proclaimed maverick.

After spending nine weeks travelling from one end of the country to another, promising the people of America that her leadership is building the largest and most expensive natural gas pipeline in the history of the United States, Governor Sarah Palin returns home to face the music; her leadership is building no such pipeline.

Maybe she thought she'd get elected and could leave the truth behind for others to handle. Maybe she thought Joe the plumber and the press had short term memories and would forget about her pipeline lies if she ran for national office again in the future. Or maybe, just maybe, Palin didn't see anything wrong with being extremely liberal with the truth when talking to the so called elite liberal media.

But whatever the reason for her being less than honest with Americans about her actual success in trying to manage the development of Alaska's economic future, this "Top Gun" looks more like the movies character Goose than the movies character Maverick.

The only thing that one has to understand about the Alaska Natural Gas Pipeline is that not one piece of steel pipe can be ordered until Exxon, BP and ConocoPhillips, write the checks and assume all of the risk.

And given all of her tough talk on the campaign trail about how she "took on big oil" and "broke up their monopoly" while jump starting this project, Palin now finds herself boxed in by her tough talk. Yes, it will be big oil who will decide the fate of this project, not Sheriff Palin.

The best explanation comes from Hal Kvisle, CEO of TransCanada, an independent pipeline company. "Eventually, it's come down to the big producers. ExxonMobil, ConocoPhillips and BP are the ones most likely to hold the shipping commitments, so whatever kind of project is put together has to be one that works for the producers," Kvisle said.

In fact, three days after the Alaska State Legislature approved Palin's pipeline plan to nowhere, where they granted Kvisle's company up to $500 million in taxpayer money and exclusive rights, Kvisle was quoted in the Toronto media as saying, "Nothing goes ahead unless Exxon is happy with it."

And my friends, Exxon ain't very happy.

On Friday November 14, as Governor Palin was being photographed by the paparazzi, lounging poolside at a Miami Hotel with her assistant on the taxpayers dime, her Commissioner of the Department of Natural Resources Tom Irwin, was treating one of the state's biggest taxpayers like a member of the paparazzi.

In an attempt to move the gas pipeline project forward by honoring their plan of development they proposed for the Point Thomson gas field -which is critical for the success of the Alaska Natural Gas Pipeline- Exxon applied for a permit to build an ice road to transport a custom made drilling rig to the field for a planned February test.

Unfortunately Exxon's permit was denied.

But not only was the permit denied, which means Exxon will miss out on this winters drilling season thus delaying any progress at Point Thomson, but worse;

Commissioner Irwin didn't have the class nor the gravitas to tell Exxon personally.

Exxon found out about the denial through a press release sent out by Irwin. 

The story surrounding the battle over Point Thomson is fairly clear. In 2006 the state was frustrated that Exxon hadn't moved on developing the critical field for the last three decades. Exxon hadn't moved on developing the critical field because the economics would have prevented any company from moving forward.

Even Irwin himself has stated publicly that the price of natural gas during that time prevented the serious consideration of any gas pipeline development during the time Exxon supposedly sat on all that natural gas.

So in truth the state didn't lose anything but simply deferred it's take due to the fact that Point Thomson is primarily a gas field and there hasn't been either the price point or enough gas available according to the AOGCC for offtake to make a gas pipeline economically feasible from the North Slope.

Under former Governor Murkowski, the state moved to revoke the leases in an attempt to get Exxon moving for three reasons: The long lead time in developing Point Thomson. The critical importance of Point Thomson gas in successfully developing a natural gas pipeline and the prospects for a gas pipeline were improving year by year.

However, Judge Sharon Gleason ruled that before the state could break up the unit operating agreement, they had to give Exxon one last chance to make good.

Exxon made good through a plan of development for Point Thomson that made even the harshest critics of the company agree that the state won and should declare victory and let Exxon get to work.

But that wasn't enough for the Palin administration. They rejected the proposal saying they couldn't trust Exxon even though the company had agreed to forfeit the leases if they failed to comply with the time lines in their proposal. 

Does this honestly sound like an administration that is seriously jump starting anything? This is yet another short sighted move by Palin's gas line team to try and create the illusion of leverage. Too bad for Palin and crew, they've played all of the cards in their hand.

Last year the Palin administration passed the largest oil and gas tax increase on big oil in the state's history and moved Alaska to the top of the list in taxable jurisdictions. This year the Palin administration ignored the request of big oil to think before they committed giving away hundreds of millions of tax money and special rights to a company that would never be able to do what the state was paying them to do.

Today, the Palin administration is screwed.

They've taken their pound of flesh through taxes; today they can take no more.

They've had their day in the sun by passing a pipeline plan to nowhere; today they can only watch as TransCanada spends taxpayer money while spinning their wheels. 

The governor has given her last stump speech to Americans about how she brought big oil to their knees; today she begins the process of eating her words while her political fortunes hinge on the same companies that she's taken great pleasure in demonizing. 

Today, the hunters have become the hunted.

Every Republican Governor who has their sights on 2012 will be watching as Palin struggles to free herself and her claims of being an "energy expert" from what Ronald Reagan might call, the surly bonds of reality. Or as Goose in Top Gun might say, "Maverick we've got a bogey on our tail."  

The only leverage that exists today is firmly in the camp of the companies that will decide if the economics justify giving this project a green light. And that light looks like it might be dimming a bit.

In today's Wall Street Journal, Russell Gold pens a column entitled "Palin's Pipeline at Risk." In the column he points out the changing economics, tightening credit markets and decreasing demand for natural gas.

"Current economic conditions are not good for the Alaska gas line, and I expect considerable delays in the iniation of it's construction", predicts Pedro van Meurs, an energy consultant who worked on the project under former Alaska governors Knowles and Murkowski.

Meanwhile, the Denali Pipeline Group, a consortium of BP and ConocoPhillips, is continuing to push forward conducting preliminary work to determine the projects cost in order to be ready for a proposed open season in 2010. They have spent upwards of $70 million so far and are preparing for their coming summer season in the field. The biggest concern is the status of Point Thomson.

Industry insiders tell me that it will be next to impossible to hold a successful open season without have certainty when it comes to the gas reserves at Point Thomson. With Palin's gas line team  continuing to play games with Exxon, no gas can be bid from the field if it remains in legal limbo. No Point Thomson, no gas pipeline. 

Again, does this sound like an administration that is jump starting anything?

On the other side is Palin's preferred pipeline plan that features TransCanada. Unfortunately for TransCanada, their prospective customers have now become competitors. And when TransCanada fails to attract gas shipping commitments under Palin's plan, their creative ideas floated last year to ask Congress for bridge financing have been answered by the global economic meltdown and bailout fatigue in Congress.

But the biggest hurdles to moving this project forward are Palin's biggest achilles heels when it comes to this project. And no, I'm not talking about the $350 faux croc Kate Spade heels the RNC purchased for her.

The biggest impediments to a successful project remain the continued bungling of Exxon's plan of development at Point Thomson and the contentious relationship between the administration and the oil and gas industry. The deal killing requirements of AGIA that will prevent any collaboration between Denali and TransCanada and the lack of leadership on addressing the state's ability to offer fiscal certainty once the project gets to the final investment decision stage.

All of these impediments are clouded by a fantasy world that the Palin administration has created where their gas pipeline strategy makes complete sense. 

The ignorance shown by Irwin regarding Point Thomson and his cowardice with regards to sitting down with the producers.

The faith that TransCanada and AGIA will do anything more than burn through $500 million, that with today's $49 per barrel oil price compared to $120 per barrel when AGIA passed, now seems like a helluva lot of cash to waste.

And finally, the idea that by ginning up questionable analysis, they'll force companies to build the most expensive oil and gas project in the world, during the most challenging economic times, without long term fiscal certainty.

Now that Governor Palin is home, lets hope she admits that her stump speeches and debate rhetoric - contrary to her belief - didn't jump start North America's largest and most expensive infrastructure project.

In fact, Governor Palin returns to Alaska facing the very same pipeline problems she left on August 28.

Except now, the nation and her potential political opponents in 2012 are watching her closely.